Vietnam could receive short-term benefits from the US-China trade war, besides receiving many orders shifted from China, according to the Vietnam Institute for Economic and Policy Research (VEPR).

Overview of the conference. Source: Ngoc Thuy.

This would come from Vietnam’s cultural and institutional similarities to China, said Nguyen Duc Thanh, VEPR’s director, at the launch of VEPR’s quarterly macroeconomic report on January 10.

Cheap, skillful labor and political-economic stability are also Vietnam's advantages, he added.

“In terms of long-term impact when the production supply chain shifts from China to neighboring countries, Vietnam needs to improve the institutional, business and labor quality environments to grasp this opportunity,” Thanh continued.

Thanh expected a wave of production shift could help Vietnam improve its trade balance even more.

However, Vietnam should not undermine the challenges that go along with it, as the country’s infrastructure is not yet ready to receive waves of production shift, while the economy of scale is significantly lower than that of China and India, he added.

According to the VEPR’s report, the year of 2018 witnessed the uneven and unsteady recovery of the world economy, while international institutions such as the International Monetary Fund (IMF) and the World Bank have continuously lowered their respective global growth forecasts.

Moreover, concerns about China’s economy are growing as its trade and investment growth is expected to continue to decline due to the ongoing trade tension with the US. China’s purchasing managers’ index (PMI) dropped below 50, indicating a contraction in the manufacturing sector.

The People’s Bank of China has begun to implement monetary easing to stimulate the domestic economy, Thanh said, adding that although there is still room for policy, everything is getting worse for China.

For the US side, the trade war, combined with a strong USD, made the US trade deficit temporarily widen, and 2018’s budget deficit reached the highest level in six years due to fiscal expansion.

In the region, ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) is expected to grow only 4.7% in the third quarter of 2018, down from the 5.5% recorded in the previous quarter. Notably, Indonesia and the Philippines faced a currency crisis due to Fed’s interest rate hike, and Thailand decelerated the most in ASEAN-5 as its exports was affected by the trade war.

Mixed economic results

In this context, Vietnam’s economy in 2018 saw the highest growth in 10 years, reaching 7.08% year-on-year. Growth came from the solid recovery of the agriculture, forestry, fishery and service sectors, along with the breakthrough of the manufacturing industry.

However, the FDI sector continued to be the main contributor to growth through exports with the sector’s export surplus of US$32.81 billion, or 14% of GDP, indicating the necessity of removing barriers and institutional reforms to promote entrepreneurship and the growth of the domestic sector.

Thanh, nevertheless, forecast Vietnam’s GDP growth to reach 6.9% in 2019, for which the growth engine is based on the solid foundation from previous years, as well as rapid growth from the private sector and the government’s ongoing reform process.

Forecast growth and inflation in 2019 (yoy). Source: VEPR.

For her part, economist Pham Chi Lan expected macro-economic stabilization to remain the government’s priority in 2019, especially in the context of growing global uncertainties. However, Vietnam must continue to search for new growth engines, which are key for sustainable development.

Regarding the business activities, Lan expressed concern that while the number of newly-established enterprises and new jobs did not differ much from that of 2017, the number of temporarily ceased enterprises in 2018 was unusually high, which is because of either the economic structural shift or the fundamental risk of the economy.

As a result, the government’s target of having one million enterprises by 2020 is unlikely to be met, Lan said.

Moreover, the slow progress of restructuring state-owned enterprises is causing negative impact on the business environment, requiring a step up efforts from all parties involved for more substantial improvements of the business environment, Lan added.